Last Friday morning, I attended the 2012 Residential Real Estate Forecast. The event was held at the headquarters of the St. Louis Association of Realtors and had more attendees than the lecture hall could handle (everyone wants to know what to expect in the upcoming year). While there were no prominent psychics on the bill, there was one of the top ten economic forecasters in the country, Lawrence Yun, Chief Economist of the National Association of Realtors.
Yun spent the first half of his lecture describing the current conditions of the market. According to Yun, while there seems to be a solid base for the market to stabilize back to an equilibrium, there seems to be plenty of unknown factors that have been preventing this. For example, the affordability of housing is at an all time high (low housing prices + low mortgage rates) yet there has been no meaningful pick up in home sales. National prices have been stable for the last 2 years yet everyone believes home prices have been falling throughout this period. The following is a list of current positive conditions that the economist mentioned as well as the strange behaviors of the current market.
Positive Conditions Strange Behaviors
Lowest newly constructed inventory Housing starts still dead
Huge cash reserves at banks Cash not circulating into economy
Record high profits in financial industry Bank stock prices in the tanks
FED stimulus to encourage more lending Regulation to discourage lending
Consumers work hard to show responsibility Higher borrowing cost – “jumbo loans”
Less risk of a further price decline More risk based lending and added fees
“Internal self sustaining” profits on mortgage Net losses because legacy assets
Investors are seeking bargains Not enough foreclosure properties
Improving job market Very low consumer confidence
Yun spent the second half of his lecture on the positive conditions of what needs to happen in 2012 for the market to reach a point of equilibrium. The first point was to follow the path we are currently on. The default rate on housing was a staggering 22.3% in 2007. This rate has declined to 1.1% in 2009 and seems to be just as low to day. In order to stay on the road to a healthy real estate market, we need to ensure new home purchasers are able to meet their mortgage requirements. The next step is to let housing prices recover without obstacles (private and public). If there were to be a 5% gain on home prices, there would be fewer than 2 million underwater homes. Yun stated this would then lead to bank lending opening up and increased consumer confidence improving about home buying.
The economist also mentioned potential obstacles on returning to a healthy market. He stated that an ARM 20% downpayment will destroy market recovery as well as limiting or abandoning the mortgage interest deduction.
While the market is moving in a positive direction, there needs to be a few additional changes to current conditions if we want this recovery to speed up. The first is a loosening of lending regulations followed by a boost in consumer confidence. As FDR said “A nation of homeowners is unconquerable.”
Real Estate Professional
St. Louis Real Estate
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